Sizing Up Broadcasting’s New World Order

Yesterday, FCC Chairman Ajit Pai declared that the agency would restore the UHF discount to the national TV ownership cap at its April 20 meeting. The action would reverse the FCC’s decision just last fall to eliminate the discount. It’s time “to hit the reset button,” Pai said on his blog.

In keeping with the FCC’s new practice, Pai released a 15-page draft of the order that would effectuate the change. It includes a lot of regulatory history about the cap and rehashes some of the arguments for and against restating the discount before concluding it has to go.

What Pai’s blog and draft don’t include is any discussion about what the real-world effect of hitting that reset button might be.

So, I am here the help. Check out this chart that I put together at 4 a.m. this morning (I kid you not) using basic coverage data from BIA/Kelsey.

The numbers on the chart are all percentage except the last two columns.

The chart lists the top 20 commercial station groups ranked by their “actual coverage” of the 118.4 million TV homes. You see that Ion currently tops the list at 64.8% and Graham brings up the rear at just 6.6%.

At this moment, the actual coverage is also the coverage for purposes of the FCC ownership rule (39% of TV homes) since there is no discounting for UHF stations. Note that Ion, Univision, Tribune and Nexstar now exceed the cap and that Sinclair, CBS, Fox and NBC/Telemundo are close to it.

(The draft dismisses as moot a petition that seeks to grandfather the groups that now exceed the 39% cap.)

The second column (“FCC coverage”) shows the reach of groups if the FCC goes ahead and restores the UHF discount, which counts only half the coverage of UHF stations. The percentages are considerably lower with no group near the 39%.

The third column shows how much headroom the groups have under the cap if the discount is restored.

So, the question becomes how big can each of the groups get with the discount.

That will depend in large part on whether the expanding station groups buy VHF stations, whose coverage is fully counted, or UHF stations whose coverage is discounted by half.

What I’ve done is calculate the reach for each of the groups, assuming that they buy only fully counted VHF stations (minimum cap) and assuming they buy only discounted UHF stations (maximum cap).

Here’s how I did it using Sinclair as an example.

Sinclair’s actual coverage is 38.6%, but with the restored discount, its coverage for purposes of the FCC cap is 24.3%. That leaves it with 14.7% of headroom under the FCC cap. So, if it buys only VHF stations, it could expand its reach by 14.7% (39% minus 24.3%).

If you add the 14.7% to its actual coverage of 38.6%, you get 53.6%. That’s what I will call its new “minimum actual cap.” That’s as big as Sinclair can get if buys all VHF.

But what if Sinclair buys only UHF? Because UHF coverage is discounted, that would double the coverage Sinclair could amass to 29.4%. Add 29.4% to its current actual coverage of 38.6% and you get 68%. That’s its “maximum actual cap.”

So, you see, for each group you get a range. For CBS, its cap will be between 52.1% and 66.5%. For Nexstar, it will be between 52.1% and 65%.

Ion owns only UHF stations today. If it buys only UHF going forward, it could reach the theoretically maximum allowed coverage of 78%, double the nominal cap of 39%.

The chart is terribly misleading in one respect.

All the groups cannot grow to the levels indicated on the chart. It’s a bit of a zero sum game.

There are only so many stations per market and only so many major markets, which is where the big chunks of coverage are. Only those groups with major market stations today or those that aggressively pursue the available major market stations now available (Tribune, for instance) will have to worry about bumping up against the caps once the UHF discount is restored.

I think the significance of the chart is that it clearly shows that 10 of the top 11 groups could all easily exceed 60% if they were so inclined. In fact, Ion already does.The exception is Tegna, which is capped at 56.7%. It’s weighed down by too many VHF stations in its current portfolio and, besides, I don’t think it will outbid Sinclair for Tribune’s stations, the easiest way to bulk up.

The other point that needs to be made: If the FCC restores the discount (and if it is not reversed by the courts), the industry will consolidate rapidly. Some groups will grow; some will disappear.

On his blog, Pai says that after restoring the discount he will open a rulemaking to take a “comprehensive” look at the ownership rule, suggesting that the FCC will seek a new cap based on a reasonable and thorough assessment of the TV ecosystem and broadcasting’s place in it.

This is nonsense and I suspect he knows it.

By the time that rulemaking is completed, the game will be over. The industry will have contracted. And what America business has joined together, no Republican regulator will put asunder.

Interestingly, NAB is a party to the fiction. As it argues for restoration of the cap, it has been telling the FCC that it has “no position on whether the commission should modify, maintain or eliminate” the 39% cap.

If it supports the return of the UHF discount, it has a position. And it’s that all the big groups should be permitted to get much bigger (see chart). The position reflects the thinking of the groups that dominant its TV board.

If Congress and the FCC ever get around to setting a new hard cap on ownership, I’m betting it will be one-tenth of a percentage point higher than the coverage of the largest group on the day the law/rule is adopted.

This is way too much math for a dreary day in New Jersey.

Harry A. Jessell is editor of TVNewsCheck. He can be contacted at 973-701-1067 or here. You can read earlier columns here